In an interview with The Block, Coinbase analysts David Duong and David Han said the crypto market has entered a phase of renewed stability following a tumultuous week marked by significant volatility. This shift towards equilibrium comes after a series of macroeconomic events and geopolitical tensions that sent shockwaves through the digital asset space.

“We believe the market is now directionally more balanced as investors digest numerous potential macro catalysts. This lighter directional positioning is evident in the proportional bid/ask depths of Coinbase’s BTC/USD order book,” said David Duong and David Han.

The week’s volatility reached its peak on Tuesday when over $700 million in long positions were liquidated. Escalating tensions in the Middle East triggered this massive sell-off, as Iran launched more than 180 missiles at Israel in retaliation for the latter’s military actions in Lebanon. The Coinbase analysts noted, “Bitcoin’s decline on Tuesday resulted in the highest weekly level of liquidations since early August.”

Market Stability Follows Liquidation Crisis

Following Tuesday’s significant liquidation event, the crypto market has shown signs of stabilization. The Coinbase analysts highlighted that reduced leverage in the market has played a crucial role in this newfound stability. Annualized bitcoin and ether perpetual futures funding rates have dropped from a two-month high of 10-11% to 5-7%, indicating a more balanced market condition.

This stabilization comes as investors adopt a “wait and see” approach regarding potential monetary easing by the U.S. Federal Reserve. The cryptocurrency market reacted negatively to Fed Chair Jerome Powell’s somewhat hawkish remarks earlier this week. Speaking at a conference in Nashville, Tennessee, Powell suggested that while additional interest rate cuts are probable, they would be implemented cautiously to maintain economic health.

The Coinbase analysts anticipate that U.S. monetary policy will continue to be a key focus for crypto investors. Recent labor market data has lacked clarity, adding to the uncertainty. Additionally, port strikes on the U.S. East and Gulf coasts, along with damage from Hurricane Helene in the Southeast, have further complicated the economic landscape.

Crypto Market Stability Linked to Elections

Looking ahead, the analysts identified the upcoming U.S. presidential elections as the most influential factor across all markets, including cryptocurrencies. They noted, “Both political parties have shown supportive rhetoric toward cryptocurrencies, suggesting a more favorable regulatory environment could emerge next year, regardless of who wins the White House.”

This potential shift in the regulatory landscape could have significant implications for the crypto market’s long-term stability and growth. As the political discourse around digital assets evolves, investors and market participants will be closely watching for any signs of regulatory changes that could impact the industry.

The crypto market’s stability is also closely tied to expectations regarding the Federal Reserve’s monetary policy decisions. According to the CME FedWatch, there is a 92.5% probability of a 25 basis-point cut by the Fed next month and a 7.5% probability of a 50 basis-point cut at the upcoming Federal Open Market Committee meeting on November 7, 2024.

These potential rate cuts could lead to increased market liquidity, potentially encouraging investors to seek higher returns in risk-on assets like bitcoin and ether. However, Coinbase analysts caution that the timing and scale of any monetary easing will be crucial factors in determining market sentiment and direction.

Crypto Market Shows Cyclical Resilience

To put the recent market volatility in perspective, Coinbase analysts drew parallels to a similar liquidation event in early August 202, according to Coinglass. During that period, bitcoin experienced a dramatic drop from $70,000 to below $50,000. This sell-off was triggered by global market turbulence following an unwind in the yen carry trade caused by an unexpected interest rate hike by the Bank of Japan.

The comparison to this previous event underscores the cyclical nature of crypto market volatility and the importance of understanding broader economic factors that can impact digital asset prices. The market’s ability to maintain this equilibrium in the face of future challenges will be a key indicator of its growing maturity and resilience.